Home loans expand at 15% as risk-averse buyers turn cautious

Loan prepayments rose 14 per cent in the year ended March 31 from 12 per cent the year ago after the regulator barred prepayment charges

Raghavendra Deshpande took a 20-year home loan in 2005 to buy a two-bedroom apartment inMumbai. He plans to have it all repaid within three years.

“I don’t want to have debt for long, I want to be in control,” said Deshpande, 41, a project manager at Itek Business Solutions, who took a Rs 13 lakh ($23,921) loan for his Rs 18 lakh property. “Interest rates matter too. If I continue my loan for a longer tenure, my interest payments will be higher than the principal loan amount.”

Home loan debt, at $104 billion, or 8 per cent of gross domestic product, about a 10th of US and European levels, will grow about 15 per cent annually over the next five years, to 13 per cent of GDP by March 31, 2015, according to Emkay Global Financial Services (EMKAY), a Mumbai-based brokerage.

As Indians are drawn to financial services, technology and manufacturing jobs in cities such as Mumbai, Bangalore and New Delhi, more young professionals are cautiously borrowing to buy their homes. The loans, which average 13 years at origination, are repaid in less than five and a half, according to Housing Development Finance (HDFC), India’s biggest mortgage lender. That helps banks keep bad loans in check and expand lending, and it has driven up home prices, which led the world in gains over the past decade, almost quadrupling through the end of last year.

“People in India are very debt averse,” Keki M Mistry, chief executive officer of HDFC, said in an interview in Mumbai. HDFC forecasts loan growth will expand as much as 20 per cent for the next few years. The average size of a home loan at HDFC climbed 10 per cent to Rs 21.5 lakh this year, from Rs 19.5 lakh a year ago, the lender said.

India faces an urban housing shortage of 18.8 million units, according to government estimates. The shortage will lead to inadequate housing for about a quarter of the 81 million households that live in urban India, according to a report.

“India’s demographic dividend is a major driver for the mortgage finance market,” said Brian Hunsaker, a Hong Kong-based banking analyst at brokerage Keefe, Bruyette & Woods. “A relatively younger population than other geographies ensures more people will start earning in coming years or relocate, triggering demand for mortgage loans.”

This demand is prompting optimism among India’s lenders. Mortgages account for almost half of retail loans by the banking sector, according to data from the Reserve Bank of India. Mortgage loans constitute 9.3 per cent, or Rs 4,20,000 crore, of the total loans by banks in India as of September 21, data from the central bank showed. By comparison, home loans in Singapore make up 31 per cent of total advances.

India had the biggest rise in housing prices in the world in the decade to 2011, according to astudy released by Lloyds TSB International in June. Prices in India grew 284 per cent over the 10-year period, compared with Russia’s 209 per cent increase and South Africa’s 161 per cent gain. China clocked a 47 per cent increase, the data from Lloyds showed.

Demand is also increasing for homes in smaller Indian cities such as Bhopal and Indore in central India and Jaipur in the northwest of the country. Affordable pricing, improved availability of loans and a shift in preference from independent houses to apartments has boosted residential demand.

Small Indian cities will add 354 million sq ft of homes in the next three years, according to a Crisil Research study across 65 micro markets in 10 emerging real estate cities in India. Sale of new apartments in these markets is estimated to reach Rs 18,000 crore in the year ended March 31, said CRISIL, the Indian rating unit of Standard & Poor’s.

HDFC’s top five markets for retail home loans include New Delhi and its surrounding areas, Chennai, Mumbai, Bangalore and Pune, it said.

“As the mortgage business penetrates into smaller cities the repayment period will keep coming down,” RV Verma, chairman of National Housing Bank, India’s regulator for mortgage finance firms, said in an interview. “People in smaller towns are more debt averse. This helps the mortgage finance company grow faster as they can redeploy cash again.”

Prepayments have risen 14 per cent in the year ended March 31, from 12 per cent a year ago after the regulators for banks and housing finance companies barred them from charging prepayment penalties, according to CRISIL Research estimates.

“An Indian home buyer is worried about social status and that stops him from defaulting on loan repayments linked to apartments in which they are staying,” said Santosh Singh, a Mumbai-based financial services analyst at Espirito Santo Securities.